Accounting Terms You Need to Know
- July 24th, 2014
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In order to understand our future discussions of accounting, it’s important to lay the foundation of accounting terms you need to know. Check out the beginning of our list of basic accounting terms.
More Accounting Terms You Need to Know
Capital: The financial value of all of your company’s assets, including both goods and cash. Your ‘working capital’ is calculated by subtracting your current liabilities from your current assets.
Cash Flow: This is the amount of revenue or expense that you expect your business activities to generate over a certain period of time. Businesses require a positive cash flow in order to survive.
Certified Public Accountant: In order to become a CPA, an individual needs to pass the standardized CPA exam and meet government-mandated work experience and educational requirements. Such an individual is thereby certified to provide accounting services to the public.
Deduction: When filing taxes, there are certain expenses that are related to the cost of operating a business that are able to be deducted from the company’s income. Deducting these expenses will lower the taxable income, which means the business will reduce the amount it’s required to pay in taxes.
Financial Statements: These provide a snapshot of your business’s financial standpoint during a set time period. They’re usually generated for fiscal quarters or fiscal years. Profit and Loss reports (also called Income Statements) show the income, cost of sales, and expenses of your business, and Balance Sheets show all of your business’s assets, liabilities, and owner’s equity.
Liabilities: Any debt or financial obligation held by a business. Liabilities exist in the forms of Current Liabilities and Long Term Liabilities. Current Liabilities are those that are payable in one year’s time, such as money owed to suppliers. Long Term Liabilities are those that are payable over greater lengths of time, such as bank loans.
Net Income: Commonly referred to as the company’s “bottom line,” the Net Income is the total of a company’s earnings. Net Income is calculated by subtracting the total expenses from the total revenues.
Owner’s Equity: This refers to the original Paid in Capital, which is the amount of funds paid into the business, the Retained Earnings, which are profits or losses over time, and Draws, which are any withdrawals made by an owner from his/her stake in the company. Owner’s Equity is also necessary to show for publicly traded companies in order to show shareholders the value of their stock in the company.
Return on Investment: A term often heard in many businesses, mostly referred to as “ROI,” it is a measure that evaluates the financial performance of an investment. By dividing the net profit by the cost of the investment, you arrive at the ROI for a particular investment, which is usually expressed as a percentage.
Revenue: Any income brought in by a company through its usual business activities is considered revenue, such as the sales of goods or services to consumers. Royalties, dividends, or interest paid from other companies are also included in a company’s revenue for some businesses.
This concludes our initial outline of Basic Accounting Terms. As we continue, many more terms and phrases will come up in conversation, for which we will provide another comprehensive glossary post. Are there any accounting terms that you’d like to see us provide? Please let us know on Facebook!